Test Anxiety

Everything you need to know about the bank stress tests this week is buried in the NY Times happy-face story this morning.

One outstanding question is how tough Timothy F. Geithner, the Treasury Secretary, and other officials will be on the banks they judge to be weak. The government has delayed the release of the results from Monday, and bank executives are arguing for a more lenient approach.

The Obama administration has angered Wall Street with some of its early steps, but it has also proven unable to be as tough as it initially suggested on several occasions. Last week, at the urging of Wall Street, the Senate defeated a bill that would have made it easier for homeowners to avoid foreclosure.

The administration’s critics worry that the stress tests will follow this pattern. They say that Mr. Obama and his advisers either have too rosy a view, or are stalling — and pretending to be somewhat optimistic, even as the banks’ problems fester — until they think Congress is willing to approve more bailout money.

One of the critics’ concerns is that the stress tests — originally meant to show investors whether banks could survive an unexpectedly bad next two years — no longer seem to have an extremely dark forecast. As job losses have mounted, some economists’ forecasts for unemployment and growth have come to resemble the stress test’s assumptions.

Regulation is negotiation, and the American public is losing the battle. As Yves at Naked Capitalism says on the subject:

I am coming to realize there might be method in the seeming madness of changing dates and shifting sneak previews via favored members of the press as to what the stress tests might entail.

Tire out the critics, numb the casual followers, and leave the boosters in firm control of share of mind.

Let's face it, the fact that the authorities are allowing banks to negotiate the findings is a very very bad sign. It says either they don't trust the results themselves, or they lack the guts to act like they are in charge. But regulators are always in charge (well until fifteen plus years of criticism in the media and Congressional budget cuts left them undernourished and fearful). And now they also have the power of the purse on their side too.

But of course I've been saying that for months now. The stress tests were never anything more than a public relations exercise that got too big to control, but the confusion and the size of the beast actually makes it easier to spin. All this terribly complex stuff really means everything is fine! All the banks are solvent, they just need more money!

Since the number one priority of Treasury is not to objectively determine if banks are solvent and not to defuse the derivative nukes that are ticking on each banks' balance sheet, but to convince investors that everything is fine and buy enough time for the banks to somehow fix the problems themselves, Treasury has now become an adversary to the truth. Timmy, Helicopter Ben, and especially President Obama have a vested interest in pretending the banks have weathered all their problems, have magically come up with record-setting first quarter numbers due to a suddenly vibrant economy rather than under-the-table counterparty payments through AIG, and are well on the road to recovery rather than just in the eye of the hurricane with the storm wall fast approaching.

It's a ludicrous plan. But rather than take action, the administration is stalling, counting on the markets to fix a multi-trillion dollar problem. The banks know they can continue to extort taxpayer money forever now. And they will continue to do so until somebody stops them.

But who? Plan N is dead. There will be no bank receivership, no real regulation, no change in the system. Only the funelling of money to Obama's corporate masters. If you were under any illusion that government regulated finance even after a near collapse of the global economy, you're sadly mistaken.

Everything will remain the same for the next stage of the collapse, including the most intransient fact: The fact that you'll pay.